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Financing Your Business

How Past Decisions Can Affect Your Loan Options

Last Updated on May 15, 2017

Rieva Lesonsky is a small business contributor for Fundera and CEO of GrowBiz Media, a media company. She has spent 30+ years covering, consulting and speaking to small businesses owners and entrepreneurs.

Before you seek financing, it’s important to understand how your past bad decisions can affect your chances of getting business loans.

What Did You Do?

Your situation will depend on whether you have a misdemeanor or felony on your record.

While the definitions might vary with the state you live in, a misdemeanor is usually a crime—like petty theft, public intoxication, disorderly conduct, trespassing, vandalism, reckless driving, or possession of cannabis—punishable by up to 1 year in jail.

Felonies are more serious crimes with the potential for 1 year or more in prison. There are different degrees of felonies, but they include crimes like burglary, arson, sexual assault, manslaughter, and fraud.

Having a misdemeanor on your record generally won’t affect your ability to get a loan, according to Kate Morgan, Senior Loan Specialist at Fundera, but a felony might, especially if you’re looking for a medium-term or long-term loan.

A Lender-by-Lender Basis

But “might” is the operative word, because whether you’re approved or denied really depends on the lender.

Morgan cites a case where she was working with a small business owner who had applied to two lenders for a medium-term loan.

One lender conducted a background check and found a decades-old grand theft auto case from on the prospective borrower’s record. As a result, they denied the loan. The other lender didn’t do a criminal background check and approved the loan.

Why Your Record Matters

“Lenders look at the 5 C’s of credit,” explains Morgan, “one of which is character.”

Especially for small businesses, which are often closely held with just one or a few owners, character is a major issue, she says. Even if your loan is ultimately approved, having a felony on your record can make the approval process take longer and will raise your interest rate.

“Lenders price a loan based on certain risks. If you have a felony on your record, you go up a risk tier, and your interest rate will be higher.”

What Kind of Loan Are You Looking For?

Because SBA loans are guaranteed by the federal government, SBA-approved lenders are especially strict with regards to character.

The SBA loan application will ask about your criminal record and, even if your record was sealed or expunged, you need to answer honestly, because the lender could conduct a background check.

At the other end of the spectrum, Morgan says, short-term lenders rarely ask about criminal records. However, short-term loans typically have higher interest rates than loans with longer terms, and might not fit your financing needs.

What Should You Do?

So what should you do if you do have a criminal record? Should you not even try to obtain an SBA loan and resign yourself to a high-interest loan?

Not at all, says Morgan.

“There are many other things that factor into getting a loan,” she says. “If you check all the other boxes, like a good credit rating and a history of business success, and you qualify for a loan, you should pursue it.”

Applying directly to lenders yourself makes it more difficult, because you won’t know a lender’s policy regarding criminal records up front. This is one reason to work with a company like Fundera that matches businesses with lenders.

Answer Honestly

Because they’re familiar with different lenders’ policies, Morgan explains, they can help guide you to the best match for your situation. However, she says, it’s important to “be forthright about your background” with your Fundera loan specialist so they can help you appropriately.

While you shouldn’t volunteer information about your criminal record in conversation with a potential lender, Morgan says you should always answer honestly on the business loan application if there’s a question about your record or if you’re asked in person.

“If it comes up, be transparent about it,” she advises. Because lenders don’t share information among themselves, one lender finding out about your criminal record won’t affect your chances with other financing sources.

Reading Between the Lines

One last thing to know about criminal records:

Lenders won’t tell you if your criminal history is the reason your loan application was denied. Instead, Morgan says, they’ll typically state something vague about “character.”

If you’re working with Fundera, they’ll be able to read between the lines in a way that you might not when applying directly to a lender. Not only can this help you make a better choice with your next application, it can also help you correct bigger problems.

In the case of the small business owner she worked with, Morgan says, the grand theft auto charge was erroneous, and after discovering the mistake, he was able to have it removed from his record.

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those
of the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

Rieva Lesonsky is a small business contributor for Fundera and CEO of GrowBiz Media, a media company. She has spent 30+ years covering, consulting and speaking to small businesses owners and entrepreneurs.